3/6/2019. Heavy Equipment Litigation: The Aftermath. What is a compressor package? What is a compressor station?

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1 Heavy Equipment Litigation: The Aftermath Chris Jackson PERDUE, BRANDON, FIELDER COLLINS & MOTT LLP 3301 Northland Dr., Suite 505 Austin, TX What is a compressor package? What is a compressor station? 1

2 How did this begin? During the 82nd Legislature in 2011, HB 2476 amended Tax Code Section effective January 1, Statute changed the treatment of dealer s heavy equipment held for lease to that of equipment held for sale. How did this begin? Tax Code Section (b): The market value of a dealer s heavy equipment inventory on January 1 is the total annual sales, less sales to dealers, fleet transactions, and subsequent sales, for the 12-month period corresponding to the preceding tax year, divided by 12 Total annual sales are equal to the total amount for each sale of heavy equipment AND lease and rental payments received for each lease or rental of heavy equipment. AKA 1/12 th of the prior year s lease payment is the market value. How did this begin? Heavy Equipment Defined in Tax Code Section (6) as: selfpropelled, self-powered, or pull-type equipment, including farm equipment or a diesel engine, that weighs at least 1,500 pounds and is intended to be used for agricultural, construction, industrial, maritime, mining, or forestry uses... Heavy Equipment weight limits were reduced from 3,000 to 1,500 pounds. Companies claimed the statutes clearly applied to their inventories of compressors and that they didn t want to be penalized for failing to comply as those penalties were significant. 2

3 How did this begin? TEXAS CONSTITUTION ARTICLE VIII Taxation and Revenue SECTION 1: Equality and Uniformity; Tax in Proportion to Value; Income Tax; Exemption of Certain Tangible Personal Property from Ad Valorem Taxation A. B. Taxation Shall Be Equal and Uniform All Tangible Personal Property Shall Be Taxed In Proportion To Its Value. How did this begin? TEXAS PROPERTY TAX CODE SECTION 23.01(a): All taxable property is to be appraised at its market value as of January 1. SECTION 23.01(b): The market value of property shall be determined by the application of generally accepted appraisal methods and techniques. Appraisal Districts Are Required to Appraise All Property Equally and Uniformly. How did this begin? COMPRESSOR TRADITIONAL MARKET VALUE Unit V HP COMPRESSOR 2011 TAXABLE MARKET VALUE = $474, Taxes $13, VALUE AS DHEI Unit V31 1/12 th of PRECEDING YEAR S RENTAL PAYMENTS = TAXABLE MARKET VALUE Taxable Value = $12,400 or 2.6% OF THE 2011 TAXABLE VALUE 2012 Taxes $352 or $13,145 less than 2011 s Taxes 3

4 Who was involved? PBFCM had approximately 125 cases EACH AND EVERY year. We ended up with about 650 at the end ( ). Several other firms represented their appraisal district clients in this litigation: Mccreary Veselka / Kirk Swinney and Ryan James Hargrove and Evans McLeod, Alexander, Powel and Apffel, PC, / Anthony Brown Who was involved? There were approximately 100 counties / appraisal districts initially facing this issue. Each county obviously have several taxing units Who was involved? 4

5 The Litigation In a Nutshell District Court and Courts of Appeal A small handful of cases were tried or decided on motions for summary judgment or partial MSJs and trials on remaining issues of fact. Six cases went to and were decided by various Courts of Appeal. Valerus Compression Serv. v. Gregg Cty. Appraisal Dist., Cause No CV Midcon Compression L.L.C. v. Reeves County Appraisal District and Loving County Appraisal District, Cause No CV EES Leasing LLC and EXLP Leasing LLC v. Ward County Appraisal District, Cause No CV EXLP Leasing LLC and EES Leasing LLC v. Loving County Appraisal District, Cause No CV Valerus Compression Services v. Reeves County Appraisal District and Loving County Appraisal District, Cause No CV In EXLP Leasing LLC and EES Leasing LLC v. Galveston Central Appraisal District, No CV Petitions for review were filed with the Texas Supreme Court in the last 5 of these cases. The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD The Equipment Companies argued: Texas Constitution Article 8, Section 1(b) provides that property shall be taxed in proportion to its value, which shall be ascertained as may be provided by law. Market value is not a constitutional mandate but a statutory default. Constitution grants Legislature broad deference in providing by law for the valuation of property for tax purposes. Value should be based on lease revenue and not on traditional market value. Situs should be based on where the property returns for maintenance or the company has its business - not where it is physically located / used on January 1. The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD The CAD s response was: Texas Constitution Article 8, Section 1(b) provides that property shall be taxed in proportion to its value, which shall be ascertained as may be provided by law. Value means market value as determined by a willing buyer and willing seller. Provisions of Chapter 23 on heavy equipment are unconstitutional Sections and cause a 97% decrease in tax revenue on compressors. This is an economic hardship on local taxing units the Legislature could not have intended. 5

6 The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD The CAD s response was: Tax Code Section 21.02(a) property is taxable by a taxing unit if it is located in the unit on January 1 for more than a temporary period. Sections and do not mention situs. Property was there on January 1. In some cases property was there for years. Received police and fire protection. Arrived at site via county roads. The general situs provisions in Chapter 21 control. The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD RULING was Unanimous To read market value into the constitution would both add a word the drafters omitted and reduce legislative discretion to a purely ministerial duty. If value must always mean market value what is left for the Legislature to ascertain and provide by law? The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD The constitution does not compel market-value based valuation. That fact does not change simply because the Legislature has enacted a tax code built on market value terminology. The Legislature may constitutionally draw distinctions so long as the classifications are not unreasonable, arbitrary, or capricious. Heavy Equipment Statute Is Presumed Constitutional. 6

7 The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD The Legislature is free to adopt the mode of ascertaining the value of any class of property by such method as it might deem best. The taxing units should seek legislative relief from any potential economic problems arising from this ruling. The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD Omission of term taxable situs in statutes does not mean the Legislature says nothing on the subject. The Legislature created a statutory framework that assumes or necessitates rules that are different than those in Chapter 21. Sections and when read together reflect the Legislature s intent to fix situs at the location where the dealer has its maintenance yard or principal place of business. The Litigation In a Nutshell Texas Supreme Court EXLP Leasing LLC and EES Leasing, LLC vs. Galveston CAD Ward County Appraisal District v. EES Leasing LLC et al, raised another couple of issues: Are the compressors heavy equipment under Texas Tax Code (a)(6)? Are they inventory when they are out in the field and don t come in on a regular basis? The Court determined the compressors were heavy equipment. They are self-powered just like any heavy equipment that relies on an integrated combustion engine. 7

8 Constitutional Market Value Taxes Lost Canadian ISD alone has written checks for over $1 million in refunds. Kyle Lynch, Superintendent of Canadian ISD 8

9 Taxes Lost Parker County's compressors valued at $35 million have been taxed locally since 2012, and the Supreme Court decision could mean Weatherford College has to turn over $176,000 in revenue from taxing the compressors between 2012 and Weatherford ISD could be on the hook for a $399,000 refund. s/attorney-gas-compressor-lawsuit-could-get- worse/article_02faffb4-5f87-11e8-9ed6-579c b.html Taxes Lost Based on preliminary information, Kilgore ISD might have to pay back $675,000 in tax revenues accrued over three years, said Revard Pfeffer, the district s chief financial officer. Kilgore City Manager Josh Sellleck said the city will lose about $300,000 for the six-year period. He said the lost revenue at $50,000 a year is close to a half-cent of the city s tax rate, but Kilgore adjusted by planning accordingly and budgeting conservatively. Longview is expected to lose anywhere from $40,000 to $70,000, city spokesman Shawn Hara said. Taxes Lost Upshur County and jurisdictions within it will lose an estimated $58,000, Chief Appraiser Sarah Curtis said. She said the amount is small because the county removed compressor accounts from the tax rolls from 2013 to 2016 and restored them in 2017 because of the appellate court ruling. The high court ruling could cost Carthage ISD $25 million in taxable values, Superintendent Glenn Hambrick said. We hate that we lost those values, but that is something that is kind of out of our control, obviously, he said. 9

10 Taxes Lost Spring Hill ISD faces an average loss in taxable value of $577,030 per year over the six-year period, Superintendent Steven Snell said. That amounts to a loss of $48,182 over the six-year period. 8f6c9f html Taxes Lost Wise County entities collectively could have to return $2.815 million in property taxes and interest to natural gas companies as a result of a court decision on the taxable value of large leased compressors. Taxes Lost 10

11 Taxes Lost Taxes Lost Wrap up via Agreed Judgments PBFCM had about 650 cases 11

12 Wrap up via Agreed Judgments Issues with account details / descriptions Not enough info Conflicting info Each owner, appraisal co, software provider, cad, taxing unit had a different account number Compressors moving within the county during litigation years. Tended to use PID, Geo ID, Plus a property description. Lots and lots and lots of phone calls with clients About case what does this mean? What is an AJ? What is the process? Questions on Attorney s Fees? Questions on Court Costs? What do I do with this AJ? Make changes to the appraisal rolls. How long do I have to do that? No later than 45 days after the date of appeal is finally determined the chief appraiser shall correct the appraisal roll and other appropriate records as necessary to reflect the final determination of the appeal and certify the change to the assessor of each affected taxing unit. Tax Code Sections 42.21(a)(1) & (2). 12

13 What do I do after I make the changes to the roll? Send it the certifications Upon receiving the certification to the assessor of each affected unit. They need to correct the tax roll and other appropriate records. Read Tax Code Section When can they do that? The Assessor cannot send a refund before the earlier of 21 days after the final determination or the date the owner files a designation form where refund is to be sent My TAC doesn t have the money / got the certification late / doesn t want to issue the refund what now? Unless a taxing unit issues a refund in 60 days of the chief appraiser certifying the correction - interest is increased to a 12 % annual rate. If the refund not issued in 180 days after chief appraiser certifies the correction the taxpayer may file a lawsuit to compel refund / interest and is entitled to costs and reasonable attorney s fees. What interest rate do I use? Prior to 2016 Tax Year use prime plus 2% Pursuant to (the old) 42.43(b) - Interest on a refund will be Prime rate +2% and capped at 8% Tax Year and after use 9.5% The Legislature amended Tax Code Section 42.43(b) effective 1/1/16 and made the rate an annual rate of 9.5%. This applies only to 2016 tax year cases going forward. 13

14 What is the prime rate? Where do I find it? 5/current/ Is it simple of compound interest? Simple. HYPOTHETICAL For Refunds on Cases Prior to 2016 Tax Year TAX CODE 42.43(b) Say you have a 2013 Tax Year Compressor Case Get Prime Rate at First of The Month Refund is Made so 5.5% on Feb. 1, 2019 Add 2% to That so 7.5% Rate can t be greater than 8% it isn t here Calculate interest period from delinquency date here 2/1/14 to date refund is made 2/26/19 HYPOTHETICAL For Refunds on Cases After the 2016 Tax Year Say you have a 2017 Tax Year Compressor Case Interest Rate is 9.5% Calculate interest period from delinquency date here 2/1/18 to date refund is made 2/26/19 TAX CODE 42.43(b) 14

15 Number of days / year link Simple interest calculator link Taxpayer had delinquent taxes and paid that, the penalty & interest, now they won and want a refund What do I do? Case law exists that a taxing unit can only keep the P&I attributable to the base tax retained. Since none here the refund needs to includes the base tax, the P&I, any other collections penalties and that be subject to litigation interest. We hit them with a rendition penalty. Do we have to pay that back? Yes. You have to refund that back plus interest 15

16 Schools / Audits Can ISD s recover some of the lost revenue through the audit process? Yes. It is possible that and ISD can recover the lost revenue. Schools / Audits Can ISD s recover some of the lost revenue through the audit process? Do property rich schools get half of their contribution back? 25%? Less? Will TEA have any money left? Will there be a run on audits by everyone trying to get there before it runs out? Schools / Audits What if a school district has to take out a loan to pay the refund? Can they? Is that loan a debt? 16

17 Schools / Audits ISDs should consult with the firm that does their audits for more details and answers based on their situation. The Aftermath 25.25s Firms, agents protested but failed to file suits for tax years, certain accounts, etc So they are coming back with 25.25(c) s Location Multiple appraisal The Aftermath 25.25s So what to do with these? The short answers are: 1) you can agree; 2) disagree; or 3) ask for more info / wait / evaluate. 17

18 The Aftermath 25.25s If you want to go along and agree on the 25.25s I believe you can resolve them via 1.111(e) settlement and waiver 25.25(c) joint motion to your ARB and agree to their point, get the ARB determination and remove them from the roll 25.25(b) if you have a board rule If you want more info / to evaluate, you could request inventory details or declarations in other counties as support / a basis for agreeing. The Aftermath 25.25s One perk of the if it is for past years is that the interest on the refund is not triggered until after so many days after the change is ordered / made it will not go back to the delinquency date several years back. Review Tax Code Section 26.15(f) for the refund and Section 31.12(a) for the interest. The Aftermath Different Companies Seeking DHEIV MICKEY HAND RPA,RTA,CTA Chief Appraiser / Tax Collector Assessor WISE COUNTY APPRAISAL DISTRICT 18

19 Legislation Legislation Legislation 19

20 Legislation Legislation Legislation SB 411 Hughes Adds ; amends 23.12, Adds retail inventory held for sale to the special inventory appraisal process. Retail inventory is all tangible personal property that the retailer holds for sale during a 12-month period and which is not tax exempt. Sales price of the inventory is what the retailer paid for the purchase of the inventory. The inventory s market value on January 1 is the total annual sales, less sales at wholesale and sales to retailers, for the preceding tax year 12-month period, divided by 12. For the nine-year period of January 1, 2020 to December 31, 2028, the market value is the greater of the average monthly sales from the preceding year or the following percentages, based on the regular inventory appraisal under Section 23.12: 90% for 2020, 80% for 2021, 70% for 2022, 60% for 2023, 50% for 2024, 40% for 2025, 30% for 2026, 20% for 2027, 10% for The chief appraiser shall estimate the retailer s inventory market value if not a retailer on January 1. The Comptroller develops a declaration form to be filed by the retailer by April 15 annually, or within 30 days of business commencement. The chief appraiser may examine the books and records of the retailer, with 15 days written notice to the retailer. There is no pre-payment of inventory taxes to the county tax assessor-collector. The inventory excludes a dealer s motor vehicle inventory, a dealer s heavy equipment inventory, a dealer s boats and motor inventory or retail manufactured housing inventory. Current law provides that these types of inventory are based on this monthly average process. Proposed Effective: 1/1/2020. Status: SB 411 referred to Senate Property Tax Committee 2/14/19. 20

21 Heavy Equipment Litigation: The Aftermath Chris Jackson PERDUE, BRANDON, FIELDER COLLINS & MOTT LLP 3301 Northland Dr., Suite 505 Austin, TX